Wealth of Nations August 2007

Beyond Trade Adjustment Assistance

Workers who lose their jobs because of trade are no more deserving than workers whose jobs disappear for other reasons.
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This week Sens. Max Baucus, D-Mont., and Olympia Snowe, R-Maine, introduced a new Trade Adjustment Assistance bill. Aimed at helping workers who get sacked because of foreign competition, it would extend the current law, which expires at the end of September, for five more years. The plan is to provide more money for training and health insurance, and to broaden eligibility beyond manufacturing to service workers who lose their jobs to offshoring.

Congress has passed previous incarnations of TAA (it dates back to the early 1960s) as part of bargains granting the president fast-track authority to negotiate trade deals. The thinking was straightforward: Freer trade is good for the country, but there will be losers; aid for displaced workers will ensure that some of the gains are used to support the victims. TAA was a political bargain—between congressional trade skeptics and trade-promoting presidents, and between the country at large and those who lose out because of trade liberalization.

The new bill's prospects are uncertain. Because the Democratic-controlled Congress is in no mood to grant trade-negotiating authority to President Bush, some Republicans are grumbling that they might not support TAA, up till now a bipartisan endeavor. To try to block the law's extension looks wrong on the merits and, as a matter of political calculation, idiotic—but pause for a moment to ask whether TAA really makes sense.

Harvard's Greg Mankiw (a former chairman of the president's Council of Economic Advisers, and a loosely affiliated consultant to GOP presidential candidate Mitt Romney) poses two good questions about the program on his blog (Gregmankiw.blogspot.com). First, "Can you really tell whether a worker is losing his job due to trade or due to other forces, such as technological change?" Second, "Is a worker who loses a job due to trade deserving of a more generous safety net than a worker who loses his job due to other forces, such as technological change?"

The answer to the first is, not really. TAA is aimed at mass layoffs, such as plant closings, and these may have any number of causes. Only now and then will foreign trade or offshoring be solely or obviously to blame. In any case, most redundancies don't come from mass layoffs but from the smaller-scale restructurings that are part of any consistent effort to keep an enterprise efficient. In those instances, the trail back to underlying causes—trade, domestic competition, advancing technology, shifting tastes, whatever it might be—will be even harder to follow. As for Mankiw's second question, the answer is clear: No, workers who lose their jobs because of trade are no more deserving than workers whose jobs disappear for other reasons.

A humane attempt to help displaced workers should not concern itself with a forensic examination of the forces that brought about the firings. There should be no need for firms, unions, or workers to petition the Labor Department, adducing evidence that trade was to blame, and no need to restrict TAA eligibility to that narrow group. A study from 2002 attributed just 1.5 percent of job losses caused by mass layoffs to import competition. You could multiply that proportion by 10, allowing for the uncertainty, and the number would still be small.

The only rationale for confining worker assistance to the victims of trade is political: namely, that it might buy support for open international markets.

But lately, TAA has failed to do even that. Possibly, its existence makes the politics of trade more difficult by seeming to blame trade for dislocations that are really caused by other factors.

TAA has been ineffective by its own lights, because its rules restrict the benefits even among those who are broadly eligible. Last year the Labor Department ruled that 400,000 or so workers were eligible for TAA's benefits; fewer than 100,000 applied for them. Once workers are in the scheme, their access to particular benefits is further restricted by various qualifying conditions. One of the program's elements, for instance, is wage insurance. Qualifying workers who take a new job at a lower wage than they earned in their previous job can, for a time, get part of the difference repaid—as long as they are also over age 50, find a new job within 26 weeks of getting fired, and were aware of the benefit in the first place. In 2006, according to the Government Accountability Office, barely 6,000 workers received the insurance.

Altogether TAA cost about $1 billion last year. The new law, its sponsors reckon, would probably double that. To put this in perspective, the fiscal cost of the tax exemption for state and local bonds is roughly $25 billion a year. The cost of the Earned Income Tax Credit is about $50 billion a year. The expanded TAA's predicted cost of $2 billion a year is about what Belgium spends on overseas aid.

The country needs a much better safety net for displaced workers—one that protects all of them, not just those who succeed in convincing the Labor Department that trade was to blame. The question is, what form should this take?

The TAA's benefits, once a worker succeeds in getting them, are generous, especially by American standards: cash assistance for up to a year and a half after state unemployment assistance runs out (provided that the worker looks for a job and undergoes training); relocation allowances; job-search assistance and allowances; wage supplements for older workers; and payments to help meet the cost of health insurance. To spread a program of this sort widely enough to help most displaced workers would be very expensive, and it might be unwise for other reasons. What a shame if the United States adopted European-style worker protections only to be rewarded with European-style unemployment rates. If Europe's experience is a guide, extended cash assistance to the unemployed runs that risk. If you curbed that particular element of TAA, coverage could be greatly expanded without the cost getting out of hand.

In addition, though, an effective safety net for displaced workers needs to look beyond TAA (or Economic Adjustment Assistance, as it should be called from now on). Many aspects of American economic life conspire to worsen insecurity—to make spells of unemployment scarier than they need be. A wise Congress would look at these wider aspects of the matter and ask what could be done to ease the stress that American workers face, even if these other remedies lie outside the scope of a narrowly conceived worker-assistance program.

The clearest instance is health care. This is an issue that demands far-reaching reform in its own right, to be sure, but that also has an important bearing on economic insecurity. Because of the way America finances health care—through taxpayer-subsidized employer-provided insurance—workers depend on their jobs not just for their earnings but also for medical care for themselves and their families. This locks some people into jobs they might otherwise wish to leave, and it makes even temporary unemployment an alarming prospect.

The artificially created link between employers and health care—it is a product of the tax code—has a strong claim to be the biggest all-round disaster in American public policy. Unfortunately, most proposals for reform from both Democrats and Republicans fail to attack this connection. They seek to widen coverage—a good thing—but not to get employers out of the picture.

Another example is debt. Again, the tax code is to blame. It creates a strong incentive for American households to borrow. It is easy nowadays to borrow against the value of your home; in fact, it is difficult not to, such is the torrent of offers of "low-interest" home-equity loans. Interest on these loans is tax-deductible. On the other hand, the Internal Revenue Service very much frowns upon saving.

Put some of your after-tax wages in the bank, and you will be taxed again on the interest. Buy some shares with your after-tax wages, and (once the company has paid America's very high rate of corporate tax on any profit it makes) you are taxed again on the dividends or capital gains. The logic is hard to resist: Don't save, spend. And judging by the figures for national saving, Americans are a very logical people.

Saving is the first line of protection against unforeseen setbacks, such as getting laid off and having to find a different job. The connection between diminishing savings and worsening economic insecurity is not much drawn, but it seems to me obvious. One of the best things that Congress could do to make Americans feel more comfortable in a world of accelerating economic change is to remove the penalties it has put on saving and the rewards program it has created for getting into debt.

There are other, even better reasons to fix health care and the tax consequences of saving. But getting those policies right would make a far bigger difference to economic security than would the new TAA program, or any other such scheme that Congress is likely to come up with.

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Clive Crook is a senior editor of The Atlantic and a columnist for Bloomberg View. He was the Washington columnist for the Financial Times, and before that worked at The Economist for more than 20 years, including 11 years as deputy editor. Crook writes about the intersection of politics and economics. More

Crook writes about the intersection of politics and economics.

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